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Analysis CLOs
Older CLOs show they’ve still got it
by Poh-Heng Tan
The CLO primary market is vibrant — but some older vintages are still performing very well. We look at the equity performance of US BSL CLOs that have exited their reinvestment period
This study looks at the performance of a sample of 615 seasoned US BSL CLO deals that have exited their reinvestment periods but are still outstanding. Annual distributions of CLO equity form a part of the return equation. Chart 1 shows the annual equity distributions since inception and equity NAVs of US BSL CLO deals by vintage.
Notably, the 2020 and 2021 vintages registered the highest median annual distributions. Specifically, the 2020 vintage CLOs, comprising 15 deals now outside their reinvestment period, exhibited the highest median annual distribution. The latest quarterly distribution averaged 4.9%, thanks to good net interest margins and structural leverage. Furthermore, four of these deals significantly increased their distributions by flushing out a substantial amount of par on reset during 2021/early 2022.
Par flush refers to a transfer from the principal account to the interest account, leading to a drop in equity NAV. The first period par flush tends to enhance the annual distribution of newer deals, such as those from 2020-2022 vintages. However, as deals mature, the impact of par flushes diminishes because they are spread over a longer period, reducing their effect on annual distributions. When calculating IRR, a front-loaded stream of cash flows is favourable.
1: US BSL CLO equity performance by vintage (%)
Source: Intex, S&P Global Market Intelligence, CLO Research
Value of static and short-dated deals
The 2021 vintage deals in the sample stand out due to their short reinvestment periods. There are also numerous static deals with high leverage and low management fees, which contribute to robust annual distributions for the median deal. (See table 1 for the best performers.)
Of the 21 deals from this vintage, only three recorded single-digit annual distributions since inception. These include one with a significant class X tranche, another that lost substantial par, and a third that breached its over-collateralisation test due to underperformance. Despite these exceptions, the median deal from 2021 benefited from many deals exceeding 20% in annual distributions.
4.9
%
Latest quarterly distribution of 2020 deals outside reinvestment period
Trouble grows in 2018 deals
Regarding older vintages, the 2018 vintage median deal registered a decent 15.1% annual distribution since inception. However, this was somewhat offset by a relatively low median equity NAV of 20.5%, compared to the median 2019 vintage deal’s 41.5%. Excluding deals with a single-B tranche from the calculation, the 2018 vintage deal’s median equity NAV improved from 20.5% to 24.7%. However, that figure is still significantly below the corresponding median 2019 vintage deal’s 47.3%.
Typically, a deal experiences credit losses as it ages. However, the median equity NAV gap between 2018 and 2019 vintage deals appears to be wide, indicating that 2018 vintage deals have lost more principal value than expected. This might not bode well for 2018 vintage deals.
2: Total equity distributions plus equity NAV (%)*
* Top performing 20% of CLOs
Source: Intex, S&P Global Market Intelligence, CLO Research
The median 2014 vintage deal experienced the lowest annual distribution and equity NAV. That said, a handful of deals managed by managers such as CSAM, KKR, CIFC, Canyon, Carlyle, Neuberger Berman, Octagon and Palmer Square from the 2014 vintage have performed well. These deals had been reset previously, which explains why they are still outstanding. The top-performing 2014 deal, Madison Park Funding XIII, managed by CSAM, was recently redeemed. This deal might eventually register a net IRR of around 16% and a multiple on invested capital of close to 2x, which is impressive given that the 2014 vintage is challenging.
As previously noted, when a deal distributes par on the first payment date or upon reset, it transfers cash from the principal account to the interest account. Conversely, when a deal includes a sizable class X tranche or uses the interest account to amortise the mezzanine tranches, it redirects cash from the interest account back to the principal account.
A clearer picture
Despite their importance, annual distributions can be skewed due to the transfer of cash from the principal to the interest account or vice versa. Therefore, combining cumulative equity distributions with equity NAVs provides a better perspective on a deal’s performance from an equity standpoint. The final equity NAV is key in determining the final IRR performance of a deal.
Chart 2 outlines the requirements for a deal that is out of its reinvestment period to be placed in the 80th percentile, in terms of total equity distributions plus equity NAV by semi-year vintage. ‘Equity NAV’ refers to the clean net asset value based on asset prices as of 30 May 2024.
Notably, CSAM stood out as one of the most consistent managers in delivering returns to equity investors, based on deals that are outside their reinvestment period. CSAM’s deals are in the top 20% across the 2014 to 2019 vintages.
Other consistent managers include CIFC, KKR Financial Advisors, Neuberger Berman, Palmer Square, Anchorage Capital Group, GoldenTree Asset Management, Oak Hill Advisors, New York Life, Generate Advisors, Fortress Investment Group, Canyon and Redding Ridge.
Cumulative distribution metrics do not adjust for differences in management fees, etc. See box below.
Annualised CLO equity payments
The utility of this metric diminishes when comparing CLO managers, owing to:
- Structural differences (different leverage ratios)
- Par flush
- First period interest reserve amount variation
- Class X issuance
- Release of capital on reset
- Funding of delayed-issuance tranche
- Insertion of a single-B tranche on a full refinancing
- Transfer to a collateral enhancement account (more common in EU CLOs)
- Transfer of trading gains to interest account (for risk retention compliance)
- Amortisation of the lower mezz tranche using interest proceeds
- Stub payment
- Reinvestment of equity payments
- Fee structures
